Tail co-movement in inflation expectations as an indicator of anchoring

Filippo Natoli and Laura Sigalotti

No 1997, Working Paper Series from European Central Bank

Abstract: We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail co-movements between short- and long-term distributions of inflation expectations, estimated from daily quotes of inflation derivatives. We find that, during 2014, average correlations between short- and long-term inflation expectations rose sharply; moreover, negative tail events impacting short-term beliefs have been increasingly channeled to long-term views, triggering both downward revisions in expectations and upward changes in uncertainty. Overall, our results signal a risk of downside de-anchoring of long-term inflation expectations. JEL Classification: C14, C58, E31, E44, G13

Keywords: anchoring; inflation expectations; inflations options; inflation swaps; option-implied density; tail co-movement (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-rmg
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Tail Co-movement in Inflation Expectations as an Indicator of Anchoring (2018)
Working Paper: Tail comovement in option-implied inflation expectations as an indicator of anchoring (2015)
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